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Rewarding Performance
This document discusses rewarding performance through compensation strategies. It explains traditional and contemporary compensation strategies, different types of pay plans like profit sharing and stock options, and considerations for setting performance measures, tax treatments, non-financial incentives, and global compensation. The key points are that compensation strategies should unite goals, performance measurements, and rewards; contemporary strategies use incentive-based compensation for all employees; and stock-based compensation plans reward long-term performance and management ownership.
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Rewarding Performance
- 1. Chapter 21 Rewarding Performance CostAccounting Traditions and Innovations Barfield, Raiborn, Kinney
- 2. Learning Objectives (1of 2) • Explain the relationship between compensation and maximization of stockholder wealth • List the different ways of rewarding performance • Describe the movement toward rewarding group, as well as individual, performance • List the positive and negative consequences of incentive pay programs
- 3. Learning Objectives (2of 2) • Explain why incentive programs may involve shares of, or options for, common stock • Describe the importance of nonmonetary rewards in motivating managers • Clarify how taxes affect compensation plan design • Describe the role of ethics when designing a compensation package • Identify expatriate compensation issues
- 4.
- 5. Compensation Strategy • Unitesgoals and strategies, performance measurements, and rewards • Board of directors and top management determine compensation strategy • Compensation committee – Establishes compensation strategy – Sets compensation policies/guidelines Is this a conflict of interest?
- 6. Set strategic goals Identifycritical success factors, set operational targets and compensation strategy Identify performance measures Set performance rewards Employee or employee group performs tasks Measure/monitor performance Determine rewards Plan-Performance-Reward Model
- 7. Traditional Compensation Strategy •Top managers – salary and significant financial incentives • Middle managers – salary and raises based on performance • Workers – wages and small bonuses
- 8. Contemporary Strategy • Incentive-basedcompensation to all employees • Based on group or individual performance • Encourages – higher level of employee performance and loyalty – lower overall costs
- 9. Pay-for-Performance Plans • Correlationwith organization goals – Maximization of shareholder wealth • Appropriate time horizon – Long-run perspective – Reward with stock or stock options • Subunit mission • Age of employee • Balance of group and individual benefits • Management ownership
- 10. Setting Performance Measures •Degree of control over performance output Minimize risk to worker of random effects worker specific, short-run measures upper less specific, longer-time horizon, management organization longevity measures
- 11. Setting Performance Measures •Incentives relative to organization level worker weighted toward monetary and short-term measures upper weighted toward nonmonetary management and long-term measures
- 12. Worker Compensation • Choiceof plan affected by: – Competitive focus – Organizational culture – Local laws – Union affiliation – Political consideration
- 13. Pay Plan • Periodiccompensation – function of time at work, not tasks accomplished – affected by seniority, skill, education level – no link between performance and reward
- 14. Performance-Based Pay Plans •Merit pay • Contingent pay • Piece rate These do not consider overall organizational success
- 15. Profit Sharing • Contingenton organizational success • Current and/or deferred incentives in form of cash or stock • Allocated among employees based on – personal performance measures – seniority – team performance – managerial judgment – specified formulas Profit Sharing
- 16. Stock Options • Employeecan purchase shares of company stock at a set price during a specific time period • More valuable as company stock price increases
- 17. Stock Appreciation Rights •Employee may receive cash, stock, or a combination of cash and stock • Amount based on company stock price at a future date • More valuable as company stock price increases
- 18. Employee Stock OwnershipPlan (ESOP) • Profit-sharing compensation invested in company stock • More valuable as company stock price increases
- 19. Nonfinancial Incentives • Recognitionof efforts • Participation in decision making Good Job
- 20. Managerial Compensation • Monetary •Perquisites - Perks – vacations – free child care – free parking – personal assistants or private secretaries – health care – recreational club memberships – office with a view – flexible work hours
- 21. Not-for-Profit and Governmental •Time-based pay plans; not a strong link between pay and performance • 90% of government workers support plans that would link pay and performance • Only 20% of not-for-profits provide bonus plans for top executives
- 22. Possible Tax Treatmentsof Compensation Elements • Full and immediate taxation • Tax deferral - pay tax at a future date • Tax exempt - pay no tax
- 23. Taxation of FringeBenefits • Employer-provided accident and health insurance – deductible by employer – not taxable to employee • Cafeteria benefit plans – both nontaxable and taxable benefits Benefits
- 24. Deferred Compensation • Profit-sharing,pension, and various stock-based plans including ESOPs • Company receives an immediate deduction • Employee is not taxed until distributions made (tax deferred)
- 25. Ethical Considerations • Organizationalgovernance • Role of capital markets – Takeover, raiders, and golden parachutes • Compensation differentials
- 26. Global Compensation • Expatriatecompensation • Domestic base salary and fringe benefits plus adjustments for – cost of living - housing, education, security – currency fluctuations – tax implications – retirement benefits in home currency
- 27. Questions • What aresome different ways of rewarding performance? • Why do many incentive programs involve shares of, or options for, common stock? • What are some ethical issues to consider when designing a compensation package?